The recent pledge of support from U.S. Treasury Secretary John Bessent to Argentina has sent the Argentine peso and other assets soaring, recovering from significant losses incurred last week. This backing comes from the Exchange Stabilization Fund (ESF), which has a total of $219.5 billion at its disposal. However, Bessent indicated that any decisions regarding U.S. intervention would be made following a meeting with President Donald Trump and Argentine President Javier Milei in New York on Tuesday.
Experts believe that U.S. support will provide a crucial short-term boost not only to the peso but also to the government’s standing as it approaches midterm elections. Martin Muehleisen, a former chief strategist at the International Monetary Fund (IMF) and now a senior fellow at the Atlantic Council, notes that any conditions attached to the loan or intervention from the Treasury could complicate an already intricate debt situation for Argentina. Such loans could also potentially push other creditors, such as China, further down the repayment line.
The Exchange Stabilization Fund has proven to be a powerful tool in managing economic crises. It has previously supported lending facilities during the COVID-19 pandemic in 2020 and the 2008-2009 global financial crisis. Historical interventions include financial support for Mexico and Brazil during the 1990s and for Uruguay in 2002. Established in 1934 to stabilize the dollar during the Great Depression, the ESF is authorized to purchase or sell foreign currency, issue loans to foreign entities, and acquire Special Drawing Rights (SDRs), which serve as the IMF's reserve asset.
Bessent’s commitment to support Milei reflects Trump's preference for the right-wing leader, who attended Trump’s inauguration in January. Milei has initiated a series of private sector reforms aimed at reviving Argentina’s struggling economy. This support from Washington stands in contrast to the Trump administration’s previous dealings with Brazil's leftist government, particularly concerning the legal issues surrounding former President Jair Bolsonaro.
As of July 31, the ESF held total assets of $219.5 billion, though the amount of readily available liquid assets is significantly lower, with around $173.7 billion tied up in IMF SDRs. According to Brad Setser, a trade and currency expert with the Council on Foreign Relations, the accessible firepower in the ESF is estimated to be just under $30 billion, which includes $21.9 billion in Treasury securities, $1.6 billion in cash, and $5.7 billion in foreign currency holdings. This amount is more than sufficient to manage a crisis for a country like Argentina, which is not deemed systemically critical in the global financial landscape.
The last foreign currency intervention by the ESF occurred in 2011 when the Treasury participated in a coordinated action with G7 countries to control the rise of the Japanese yen following a devastating earthquake. The largest intervention in foreign currency by the ESF took place during Mexico's 1994 peso crisis, where President Bill Clinton authorized $20 billion to guarantee loans to Mexico, which were later repaid ahead of schedule in 1997.
While the demand for bridge loans has decreased in recent years due to improvements in processes within the IMF and World Bank, analysts suggest that the Treasury could utilize the ESF to establish a stabilization credit facility for Argentina or directly intervene in the currency market to purchase pesos or dollar-denominated debt. Bessent mentioned the possibility of a central bank swap line, although direct control over such lines remains with the Federal Reserve. The Fed's swap lines are primarily intended to prevent global contagion and mitigate the effects of foreign crises on the U.S. economy.
Despite Bessent's offer of support without stringent conditions, like addressing the issue of an overvalued peso, some analysts caution that this may merely facilitate capital flight without yielding substantial benefits. Mark Sobel, a former U.S. Treasury and IMF official, indicated that overcoming investor skepticism regarding Argentina’s long history of economic instability will be challenging. With over a century of over-borrowing, hyperinflation, and defaults, investors are likely to remain hesitant, remembering past crises rather than being swayed by promises of reform from Milei.
In conclusion, while U.S. support for Argentina presents a potential lifeline for its economy, the complexities of the situation demand careful navigation to ensure that both immediate and long-term needs are adequately addressed.
